Basic Cash Management Process

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THE BASIC CASH MANAGEMENT PROCESS

Every company can be viewed as a cash pool into which funds flow from various sources. Several techniques are used to speed the collection of such funds. Conversely, cash flows out of the pool for payables and other disbursement reasons. An important aspect of cash management is to control tightly both cash inflows and outflows. When cash inflows exceed cash outflows, surplus cash builds up. This surplus can be used to repay debts or for investment in marketable securities. Alternatively, when outgoing funds exceed the inflow, the firm must raise money by borrowing or by selling some marketable securities.

THE CONCEPT OF FLOAT

A cash manager's job is to make payments to others as slowly as possible and to convert into cash – or clear – payments received from others as quickly as possible. The reason is float, the most important element of cash management. Float is the amount of uncollected funds moving through the financial transfer system. It shows up as the difference between the balance shown on a firm's checking account and the balance on the bank's books. For example, suppose a firm writes, on average, $100,000 of checks daily. If it takes four days for checks to clear and be deducted from the firm's bank balance, the firm's own books will show a cash balance that is $400,000 less than the bank's records indicate. The firm has the use of these funds, called disbursement float, as long as this situation persists.

On the other hand, the firm loses the use of check-clearing float – one component of collection float – on the checks that it has deposited in its account but that have not yet cleared. Suppose the firm deposits $90,000 in checks every day, and these checks clear in three days on average. The firm's books then show cash balances that are $270,000 larger than the bank's books indicate. Thus, the firm's net float – the difference between its $400,000 disbursement float and its $270,000 check-clearing...
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